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Where to Invest Your Money Today (Part 2 of 2)

[embedded content]Jordan Roy-Byrne: Hello again, everyone. Welcome back to the Atlas Investor Podcast with Tiho Brkan. Today, this is episode number 19 and it’s part two of a two-part episode, where Tiho is discussing where you should invest your money today or where you should be looking to invest as far as which markets could generate the best returns over the long-term future. Tiho, it’s great to have you back. It’s great to be doing another podcast. How are you?Tiho Brkan: I’m very good and yourself, Jordan?Jordan Roy-Byrne: I’m great. I’m really looking forward to what you’re going to discuss today and I’m sure our listeners are. Before we get into it, why don’t you discuss this second part of the two-part episode?Tiho Brkan: Yeah, sure. In the first part, as you know, we’ve looked at

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Jordan Roy-Byrne: Hello again, everyone. Welcome back to the Atlas Investor Podcast with Tiho Brkan. Today, this is episode number 19 and it’s part two of a two-part episode, where Tiho is discussing where you should invest your money today or where you should be looking to invest as far as which markets could generate the best returns over the long-term future. Tiho, it’s great to have you back. It’s great to be doing another podcast. How are you?

Tiho Brkan: I’m very good and yourself, Jordan?

Jordan Roy-Byrne: I’m great. I’m really looking forward to what you’re going to discuss today and I’m sure our listeners are. Before we get into it, why don’t you discuss this second part of the two-part episode?

Tiho Brkan: Yeah, sure. In the first part, as you know, we’ve looked at the outperformance of the United States stocks, small caps and large caps and how well they’ve performed over the last three years, over the last five years and over the last decade basically since the global financial crisis. The valuations are now quite skewed in favor of an attractiveness too of international equities outside of United States.

What we’re going to cover in this podcast is basically various countries that stand out and also cover why they stand out. In other words, there’s a reason why they’re attractive and cheap and that usually means that markets can remain sometimes a little bit more depressed than we think they should remain. From that perspective, we are looking for a catalyst and when there’s going to be change in a certain country, which has potential, but it’s not living up to that potential.

Therefore, the question is when do we become buyers because timing is very, very important. As my mentor used to say, “Timing is not everything, it’s the only thing.”

Where to Invest Your Money Today (Part 2 of 2)

Jordan Roy-Byrne: Okay, Tiho, before we get into the specific valuations from any of these individual countries, first, I just want to ask you a question about CAPE and the reason I want to ask you is because it seems like a lot of people in the investment world, they pan CAPE and say it’s not useful. I wanted to ask you is CAPE useful to you, when is it useful, when is it not useful and what should the average person be looking at and inferring from the CAPE data?

Tiho Brkan: That’s a great question Jordan and thank you for asking that. I mean I have seen quite a lot of articles back and forth regarding CAPE and should you use it, should you rely on it or shouldn’t you rely on it and so forth. I think like any other indicator or any other tool that you’re using, it really depends on the user. It’s up to you whether it’s useful for you or whether it suits your trading, your investing style and whether you know how to use it in the first place because if you don’t know how to use some tool, well, clearly it’s not going to be a useful tool for you.

You should probably rely on your set of signals and your kind of investment or trading style. For me, CAPE is very useful, but it’s not very useful for everything. For example, it’s not very useful for picking tops or trying to get out of overvalued markets and so forth.

I would rather use sentiment and technical indicators for that and a variety of other indicators too. When the market is trending also and there’s a strong momentum and it’s already expensive, I don’t need CAPE to tell me it’s getting more expensive. This is where a lot of people have made a mistake with United States equities, even over the last three years since the August 2015 bottom or the February 2016 bottom.

When we bottomed out due to very, very low sentiment, we started to rally upwards and we’ve had strong momentum all the way until January 2018. Everybody kept saying, “The stocks look more expensive, the stocks are more expensive.” Well, guess what,  next month, the stocks became even more expensive. Yes, we understand that but it wasn’t until after we had a blow-off top starting in December 2017, (which is like the terminal phase of any rally), that the market was ready to correct.

It wasn’t until then that we actually started to correct and valuations started to matter. Until then, it was more momentum or technical indicators than valuations.

However, when using valuations to pick bottoms, I think it’s very, very useful, in particular, certain indicators like price to book or CAPE can range and have certain standard deviation on the upside and the downside. In particular, the downside feature is very useful for me. An example is emerging market data running back about two decades or more clearly shows that when valuations go into single digits, like below 10, for example, you should really consider buying emerging market stocks.

The same is true with the price to book ratio, emerging markets went below book value during the tech bust in the early 2000s as well as Asian financial crisis and the Russian default in 1998. They did so again in the global financial crisis in late 2008 and then, finally January-February 2016 during the commodity bust and the China slowdown story. They once again approached that below book value kind of a valuation.

CAPE can be very useful and so can other indicators or valuation metrics. I personally use them quite a lot, but it really depends on investment style that a certain trader or investor uses in their day to day activity Jordan. I hope that answers the question because everybody will hold a different opinion of course.

Where to Invest Your Money Today (Part 2 of 2)

Jordan Roy-Byrne: Yes that was really fantastic. Thank you Tiho. Sticking with valuations overall from a bird’s eye view, this next chart, our listeners at the atlasinvestor.com and followers on YouTube, they can see this chart, but the listeners on iTunes are just listening to this audio. They can’t see the chart. This is a global stock market valuation matrix. It shows the CAPE on one side and then, the price-to-book ratio and there are dots showing the countries and where they are. Tiho, I want to let you describe where certain countries are on this matrix and just add a few other insights.

Tiho Brkan: Sure, well basically, the majority of the world, let’s say is trading around two times book value and around 20 times CAPE. That’s about the median or the average using the eye test. I have two boxes that I’ve created. One is called very expensive and one is called very cheap. I think this is where opportunities lie and also traps lie for investing.

I definitely don’t want to be close to countries, putting my capital into countries such as the United States or Denmark, which are basically trading at three times book value or higher. They also have a CAPE of 30 times or higher. Having said that, somebody could very easily come to me and say, “Well, if you follow this kind of a rule over the last couple of years, you clearly would have been wrong and you would have missed out on great gains as the United States continue to outperform rest of the world.”

That’s correct. That’s why I mentioned just previously, it’s important to use not just valuations, but also momentum for investing. There’s always a two-sided picture. Even in episode 1, we discussed precisely the two sides of the investing story. One is the valuations, the other is the momentum and both work very well.

If you’re a value investor, if you’re looking to deploy new capital and put it to work today, I would recommend going somewhere, where I guess future expected returns could be higher, 5, 10 or even 12 years out from now. That’s the very cheap box.

In this box, you got Greece, you got Russia, you got China, you got South Korea. You got Singapore and Italy and Israel and Poland and Turkey and the Czech Republic and Spain and Colombia and a handful of other countries, which are kind of close to that like Austria and Hong Kong, Malaysia, Portugal, Egypt, Brazil and so on.

Some of these are actually I think attractive personally to me and some of them, despite the fact that they’re cheap are not attractive and I won’t be putting my money there. It comes down to doing your own homework, your own research and realizing whether there is a positive change happening as just because something is cheap, doesn’t make it a good investment. It could stay cheap and it could get even cheaper.

Greece is a perfect example of that, which we’ll discuss later in the podcast, but there are also other countries, which might be a little bit more expensive on this matrix, but they actually, in my opinion, present a much better opportunity because they have much better fundamentals. Not all stock markets need to be extremely cheap and extremely depressed.

Usually, good quality assets don’t get very cheap. This is the case with the United States. One can very easily argue that while the United States is very expensive right now, especially relative to the rest of the world, the United States never got very, very cheap, even in March 2009. It kind of would have fallen into that blue box, where we are under 17 times CAPE and under 1.5 times book value, I think maybe not, but we would have approached that blue box for those watching the YouTube and reading the blog, but the United States still offered a great and maybe even generational opportunity to buy into the world’s greatest stock market, full of wonderful companies.

After all Jordan, Warren Buffett did say, “I rather buy a wonderful company at a fair price than an average company,” I believe he said, “At a wonderful price or a very, very cheap price.” In other words, really good assets rarely become depressed because they are really good.

Jordan Roy-Byrne: Okay Tiho, so there’s a number of countries here that we could discuss and some of these, we’ve discussed in past podcasts actually in great detail, but here and now, we’re going to try and break things down by regions. That way, we can get a lot of information out and analysis out to our listeners without droning on and on forever, but with that said Tiho, the first category that I want you to talk about is the foreign developed category. Some countries here, we have Japan, Canada, Singapore, South Korea, Taiwan, those are some examples. Give us your overview of the attractiveness of these countries as far as valuations and if there are other insights you want to share with respect to these countries.

Tiho Brkan: Sure, well definitely, so foreign developed economies, first of all, you have the Asian Tigers and the whole Asian developed story. You have Singapore, South Korea, and Taiwan and you also have Japan. One could also include Hong Kong there, but I think Hong Kong really hasn’t had like let’s say a lost decade and it’s not really depressed. If you’re a momentum investor, shorting, it’s not extremely expensive market despite very strong gains since March 2009.

At the same time, it’s quite attractive from that perspective and the momentum perspective. We could even throw in Hong Kong there, but what I like about Taiwan, what I like about Japan is the fact that the markets have had two lost decades. They’ve been going sideways since about the late 80s. They’ve only started breaking out recently, making a nominal high, new record high above the late-1980s record. That’s very exciting.

Where to Invest Your Money Today (Part 2 of 2)

From that aspect, we don’t really need a valuation matrix. When a market has done nothing for such a long period of time and there’s some kind of positive change happening there and obviously China is the positive change in the region, these stock markets are benefiting from the Chinese economic growth over the last 10 years or so. They continue to export a large number of volumes to China and their economies, in turn, are continuing to grow, but obviously, they’re so anchored towards China, whenever China has a slowdown, they’re also going to have a hiccup themselves.

Japan is very interesting as I said and so is Taiwan. Moving along, Singapore, we’ve discussed in depth in previous podcasts and I highly recommend our listeners and readers on YouTube to go and have a look at a previous podcast, where we just discussed Singapore really, really in-depth and just covered everything. I believe that was episode number 12, but Singapore is very cheap and recently in February 2016, traded below book value. It had a very high dividend yield Jordan.

South Korea has had a lost decade since 2007 and recently started to break out, which is very, very interesting as well. It’s another great story in Asia. If you look at China, if you look at South Korea and Taiwan, those three countries make up more than 50% of the emerging markets’ ETF. Even though I am counting South Korea and Taiwan as a developed economy, there’s still part of the MSCI, emerging market index.

It really depends, but I think if you ever visit Taipei or Seoul as I’ve done with both and traveled to Busan as well outside of the capital cities and had a little bit of another perspective towards Taiwan, you will clearly notice that despite the fact that both the economies are small, they’re really, really advanced and they’re great export powerhouses. In my opinion, these are definitely developed. They’re a lot more developed than let’s say Portugal and that’s counted as a developed market in the MSCI Index.

Where to Invest Your Money Today (Part 2 of 2)

Moving along, also what really, really stands out to me and catches my eye, is Canada. Canada has also had a lost decade. It might not be the cheapest market in the world. It’s kind of priced fairly just below two times book value and around 20 times CAPE. The interesting thing about Canada is that it suffered mainly due to its currency falling.

When you price the Canadian market in US dollar terms, it’s actually had a lost decade since 2007 and still going sideways. I think eventually this market will break out and like all markets eventually do, the total return continues to trend upwards. From the foreign developed markets, Jordan, these are the four, five or six countries that really stand out for me. They should have a decent future expected returns over the next 5 to 10 to 12 years.

Jordan Roy-Byrne: Okay and I’ll just add for our listeners that can’t see this right now, Singapore and South Korea are in that blue box that you designated as very cheap. Tiho, I won’t ask you which of these five or six countries are your favorites because I know that information is for your clients only. I’ll let you off on that for now.

Tiho Brkan: Thank you.

Jordan Roy-Byrne: Let’s move on and talk about another region, Southern Europe. We have the PIGS countries, Italy, Spain, Portugal and Greece. Give us your insights on these. We know that Greece is basically the cheapest market. Any interest in buying any of these and what are your thoughts here on the potential for these countries over the next 5 or 10 years?

Tiho Brkan: Well, it’s a great question and this is a perfect example of countries that are cheap but need to reform their policies. These countries are, excuse my French, but they’re lazy. Compared to the Northern Europeans, they’re just lazy and the work ethic is just on a different level. That doesn’t mean that it’s wrong by the way. They have their own style and they have their own minds. They have their own view on how life should be lived and they’re not interested to be pure capitalists.

You know one great thing about the United States is that a lot of people get up early in the morning and are go-getters and they’re ready to perform. They’re ready to be a part of a capitalistic economy. They participate in that. It’s wonderful to see and it’s been a secret sauce of United States civilization I guess and why the country has risen from a colony to such a great powerhouse of the world and basically, the empire of the world with the reserve currency over the last 70, 80 years or even longer.

Some of the other fallen empires like Spain or Italy, for example, were great once, but cannot repeat that success anymore and they really need to change their mentality because they’re nowhere near the way that the United States is running. They’re not even actually anywhere near the way that Northern Europeans are running theirs. Therefore, they’re lagging quite a lot.

Where to Invest Your Money Today (Part 2 of 2)

These markets are very, very cheap. Markets like Spain, for example,  they actually have a really good real expected return in my opinion. They should be able to do 8% on a real basis over the next 10 years. We’re just approximately discussing it here because Spain has had a lost decade and it’s been kind of trending in this big triangle technically.

I think a breakout is coming, one of these years, but you just don’t know how it’s going to play out. Eventually, markets do trend higher and this market is very, very cheap. Italy and Spain are the big ones in the PIGS and they definitely need some serious reforms. In particular, Italy as that economy has not done anything since 2007 and the situation is going from bad to worse.

When you go to Italy, it’s not even that comforting for tourists to go there anymore. The Italian mentality towards tourists is one of just, get as much money as quickly as possible and rip-off people without even giving a proper service, the way that the old Italian people used to do.

When you come to Cinque Terre or Amalfi Coast or you come to Rome or Venice or any other part of Italy for that matter, not everybody’s like that but you can just notice that the quality and the high level of service that Italy is famous for in one of the great sectors of the economy, (which is tourism) has dramatically fallen too.

They’re having political problems. The society cannot figure out in which direction it wants to go, whether they want to stay in the European Union or what they’re going to do with their banks, what they’re going to do with their incredibly high levels of government debt.

I have to say that despite the fact that the government is incredibly indebted, Italian families are some of the richest in the world. I actually have some friends, who are managing capital in Switzerland. Recently when we had a conversation over dinner, they said to me, “Tiho, who do you think out of the European region are our biggest clients and what their nationalities are?”

The first thing that came to my mind was Germany or actually even Switzerland or maybe Sweden or UK and Britain, countries like France. These are the powerhouses of Europe. No, actually it was Italy. Italian families have parked so much capital in Switzerland and other safe havens. They’re incredibly wealthy. It goes to show because they haven’t been paying taxes for so long since the government is broke and bankrupt, but the rest of the society I guess is in good shape. From that aspect, I think Italian families would weather the storm much better than let’s say the Italian government.

Where to Invest Your Money Today (Part 2 of 2)

Moving along in the PIGS section, we have Greece and that’s just been a disaster. We’ve discussed Greece before. You’ve got the property market, which is down nine years in a row and I think starting to recover now. You got the stock market that’s also gone down for 10 years in a row. It’s the worst performer out of all the stock markets in the world. It’s down something like 96% from its all-time high but recently bottomed in January 2016.

It’s attempting to make some kind of a rebound, but it’s not really a bull market so to speak. This is the country, where the question is whether it’s doing the right reforms and I think whether it’s not doing the right reforms, it’s up for debate. One of the interesting things is that my brother is right now in Athens and he was in Santorini and Corfu and all these beautiful Greek islands. We were talking over the phone just a week ago and he was telling me, “Well, you should really have a look at Athens, the population has dramatically dropped.”

Since the crisis started, they lost like 25 or 30% of their population I believe. It’s been a very, very hard impact on the society and all the reforms that have been put in place are to save European banks, which the ECB doesn’t want to let default. It’s the same with the European Union.

For Europe really to improve and for some of these countries in the south, which are extremely cheap by the way, for us, investors to allocate capital to them, we would really want to see the system properly cleaned out. We would want to see proper reforms take place and these countries move a little bit more towards capitalism and less toward socialism, where it’s less reliant on government dependence and to have more private sector reforms. I mean they are very cheap countries, but would I invest in Greece? I’m definitely not putting my money there.

Jordan Roy-Byrne: Okay, well, let’s move on to a different part of Europe. Eastern Europe, I know this is one of your favorite areas to analyze. Listeners of the podcast know that you’re investing in the Czech Republic. Some other countries there worth covering include your home country Croatia, Hungary, Poland and Russia, some very interesting opportunities here potentially. Why don’t you start off with the Czech Republic and then, maybe discuss Poland and Russia after that?

Tiho Brkan: Well, Central Europe is really the Czech Republic at a heart of it all. I noticed that a lot of investors, who follow emerging markets, they really don’t understand what’s going on in Europe. They think the whole of Europe should be one whole basket, but you have 28 nations there.

The Czech Republic has had wonderful growth over this whole expansion and it has had problems when the rest of Europe went down. What most people don’t understand is that tourism in Prague, which is predominantly the main part of Czech Republic, when it comes to I guess the economy, it’s I think something like 60% of all the action. The tourism is absolutely booming and we’re now up to 8 million foreign tourists visiting.

I think in about three to four years, as we discussed in a previous podcast Jordan, Prague could overtake Rome. The tourism industry is huge. The Chinese are coming here in flocks and flocks. They’re spending double the money of a next tourist person from another region like Germany. An average Chinese spends a 1,000 euros per night while the average German spends about 400 to 450 per night. Then, the lower it goes down to other regions and other visitors.

What most people also don’t know is that the Czech Republic is very close to Bavaria and Munich and Dresden. This area of Germany is predominantly one of the wealthiest and this is where a majority of the great companies in Germany are located. We’ve had a lot of manufacturing come across the border and into the Czech Republic, even into Slovakia and Poland.

There’s a lot of work happening in the Czech Republic, where they’re doing manufacturing on behalf of not only German companies, but the overall European companies because the wages are lower, but the working class is very, very educated. That’s very interesting too. Then, the real estate sector has been doing very well over the last four, five years. What most don’t know is that Czech krona has been doing very well against the US dollar on the relative basis and even better against the Euro. While Mario Draghi remains in negative rates, the Czech Bank has actually hiked rates four times over the last I believe 18 months.

The monetary system also is obviously at a different state. The unemployment rate here is the lowest in Europe. The economic growth and GDP is the highest in Europe. I think apart from South Korea, the Czech Republic is the only other emerging economy that’s about to turn into a developed economy.

Now, let’s think about that for a second. You go South Korea, which has done an extremely wonderful job, no doubt about that but they’ve been very fortunate geographically. They were located right next to this juggernaut called China, which has prospered over the last two decades and almost 50% of all the South Korean exports go into China. There’s a huge demand right on their border, right on their doorstep.

Imagine if you take the Czech Republic outside of the slowing Eurozone, which has issues and demographics and had crisis after crisis and you put that country into Asia or into another area of the world, where the economy is growing very strongly. I think the Czech Republic would have performed even better.

I’m very optimistic about the Czech Republic. I also have to mention that taxes are very attractive too. They’re 19% for corporations, so they’re still lower than the reforms that Donald Trump did in the United States at 21% I believe. There’s a flat tax for all wages at 15% and dividends and interest tax and withholding taxes are 15%. For investors, who create their own funds the way that I do, the taxation is 5%. So it’s very, very attractive.

When you put it all together really, there’s a lot going on for Prague and the Czech Republic. It doesn’t surprise me also that it’s very attractive from the investment perspective. When you average it out over the last 10 years, based on the price-to-book ratio, price to earnings ratio, price to cash flow ratio, price to sales ratio, Czech Republic comes out as the cheapest stock market in the world. It’s even cheaper than Greece.

Despite the fact that Greece has some very, very low valuation readings, Czech Republic’s overall is the most attractive market with the highest dividend yield in the world I believe out of the majors of 5.5%. That is one that I’m really, really interested in putting my money into now and in the longer term from now.

Where to Invest Your Money Today (Part 2 of 2)

Where to Invest Your Money Today (Part 2 of 2)

Would I invest in places like Croatia, Slovenia, Ukraine, which are also very cheap in Eastern Europe? Definitely not. Would I consider Russia? Yes, I think the future expected returns of Russia will be wonderful over the coming decade and I think the country will have another bull market, similar to the one that it had following its 1998 default.

I have been very optimistic on Poland. So Poland and the Czech Republic, I like the most. Hungary is so-so for me. There is interesting real estate in Budapest and it’s priced lower than Prague, but obviously for a reason. Yeah, I’m not completely sold on Hungary. I do like Poland and I do like Russia in the Eastern European bloc Jordan.

Jordan Roy-Byrne: Okay, thank you so much for that Tiho. Now, let’s move on and just talk about the rest of the world and emerging markets there. Some examples include Brazil, Argentina, Turkey, Egypt, Vietnam, Nigeria. I know there’s a few there that you really like. We don’t have to cover all these, but why don’t we start with Latin America and your feelings on Brazil and Argentina right now?

Tiho Brkan: Well, there are interesting reforms happening in Argentina and if you look at the economy on the ground, it has been making progress. If you look at the financial markets, the sinking currency, the spiking bond yields and so forth, then I guess the investors, who are following from their Bloomberg terminal and never get out of their office to actually go to Argentina to have a proper look, they would actually tell you that the economy is performing badly.  

They’ve never actually been to Argentina. They’ve never actually been on the ground to see what’s happening. Having said that it’s not a wonderful story either. Argentina is interesting and whether the current president will be able to continue with reforms and stay in power through all the pain the society and the civilization is currently taking and the consumers are going through, that’s a question to be seen.

Where to Invest Your Money Today (Part 2 of 2)

Brazil, that’s the country that they always say is the next greatest country in the world, but it never really gets there. Brazil had a wonderful boom into 2008 to 2011 on the back of the commodities boom, but it’s been a disaster since then.

Recently, I believe Brazil was as low as 75% from its all-time high in 2007. We’ve had a recovery. Recently, we once again had a mini-crash and Brazil remains about 50% down. The volatility is enormous, but having said that these emerging countries, they offer some wonderful future expected returns.

We’re talking about Brazil, Poland. We’re talking about Turkey and Russia. They really, really have been beaten down and battered. And Turkey in particular as well, the CAPE recently has fallen to 9.4 now, so very, very interesting. The dividend yield is above 4%. It’s all because the currencies have been sinking, the political situation there is a bit dreadful to be quite honest. The tourism has fallen a lot and places like Croatia are benefiting as tourists avoid Turkey.

Bond yields there recently shot up and went through the roof. The president is kind of running the country like a dictator in some ways. Obviously, international investors are jumping over themselves and tripping over themselves to get out of Turkey. That’s creating attractive and favorable valuations. When will there be a catalyst for us to invest? It’s hard to say.

I actually made a joke today on Twitter because Goldman Sachs, not CEO, but one of the main analyst, he was on Bloomberg saying … The question was, “Would you consider investing in Turkey right now? It’s very cheap.” He said, “No thanks, the country’s doing everything wrong.” I just said that must be the bottom because if Goldman Sachs is saying, “Don’t buy Turkey,” after it’s fallen dramatically over the last let’s say nine months or so and it’s at one of the lowest valuations since March 2009, well we must be close to the bottom if Goldman Sachs doesn’t like it because when they do like, it’ll probably be time to sell.

Where to Invest Your Money Today (Part 2 of 2)

Having said that it’s not as easy as that. These countries like Turkey, Brazil, Argentina, Poland, Russia, they have extremely high annualized volatility readings. At times, while you are offered a wonderful return, relative to where the United States is priced today, the volatilities maybe double or even double and a half of what you expect in the S&P 500.

On your way to realizing a 50% nominal return over the next 10 years, if the current valuation projections are correct, you will probably have to suffer a 30 to 35% volatility, which is maybe up to three times higher than the S&P 500. What that means, is that before you realize your gains, you might have another 30% drop, then a 90% rally in a two-year period. Then, the market could half, then the market could go up three years in a row by 25% and it’s a bit of a wild ride. It has been like that since 2007.

To have a smoother ride and for volatility to come down and compress and for the gains to become a little bit more, we need an actual uptrend or a bull market. That’s only going to happen when the US dollar peaks Jordan.

It really is at the end of the day a currency story as long as the United States Federal Reserve is hiking rates and putting pressure on long-term rates, in turn, it is putting pressure on some of these fragile emerging markets. On top of that, the higher-yielding currencies such as the US dollar now is getting a bid and a lot of the investment flows are leaving these countries and moving back towards the United States.

I mean in particular, this is also happening away from emerging markets in places like Australia, where I believe another hike or two and the Federal Reserve will have higher interest rates than the Reserve Bank of Australia, which is something that rarely happens. Usually, the Aussie dollar is known as the high yielding currency or the commodity currency because it carries the higher yield. It carries a premium and that’s why investors, they trade the spread between these two that they used to borrow money in United States dollars and they used to do a carry trade over in Australia.

Well, now, it’s completely turned around. I mean if the United States currency yields more than your local currency, why would you hold your savings in Aussie dollars when the United States dollar actually yields more and it’s a reserve a currency. Therefore, it has a bit more safety to it.

Tiho Brkan: US dollar is still the main story when it comes to all of these markets Jordan. Until that trend reverses into a downtrend, I believe some of these countries or majority of these countries, despite the fact that they’re cheap, they’ll probably continue to remain so.

Jordan Roy-Byrne: Okay Tiho that’s great. That puts a button on this issue, but there are two countries I want to get your comments and thoughts on and maybe just a couple sentences on each. I’m talking about Vietnam, which you’re very familiar with and also Nigeria. These are two countries that I think if you look at a lot of the projections out there that these are projected to be real growth powerhouses over the coming years, and the coming decades really. Maybe you could just give us a couple sentences on each.

Tiho Brkan: Well, I lived in one of the two and I know it very well. I lived for two years in Saigon for that same purpose to understand the country and where it’s going. It’s got wonderful demographics. It’s right on the doorstep with China, so it benefits from the whole ASEAN growth as well as the Chinese growth. Despite the fact that some of these countries like India and China could slow down in the near term, they have very good potential in the long term.

The global GDP center point is shifting from Europe and United States towards Asia once again like it was maybe a thousand years ago. Vietnam, I’m very bullish on and I have investments there anyway, which I’m holding long term. As for Nigeria, I pick that to be one of the good performers last year and it had a wonderful rally in 2017 for the most part of it. My clients did very, very well. Nigeria recently had the first recession since the 1990s I believe.

When the economy started to recover, I was there to scoop up some bargains, but I understand that there haven’t been any proper reforms yet and the corruption, as well as the recovery in gas and oil, hasn’t been all that wonderful, despite the fact that oil prices have gone up. The drilling sector and the exploration sector hasn’t really performed that well.

Nevertheless, looking at a long-term horizon, this is expected to be one of the top five population economies in the world. I believe that Nigeria will eventually surpass 400 million people, which will be top five in the world. I guess it’s on its way to one of the many superpowers eventually. It depends on how the country will be managed and it’s always difficult for African nations.

They have success for some time, but then usually somebody wrong comes into power and something doesn’t go the right way, the reforms stall and the investors pull out. I think Nigeria has some potential on that continent to be better, relatively speaking than the rest of the countries and jurisdictions there. I’m very bullish in the long run.

Jordan Roy-Byrne: Okay, Tiho, you covered so much today. That’s a lot for our listeners to take in and digest and think about. If possible, could you summarize what you think are some of the key ideas and the main points that you want our listeners to take away?

Tiho Brkan: Sure, well, we’re talking about the whole world, outside of United States. There are about 195 countries plus, so it’s not easy to cover it in a few minutes, but we gave it a good shot. If you got the stomach for it and you can close your eyes and put your investments away, I think Turkey and Russia will produce some wonderful returns. I think also the demographic story in India, despite the fact that it’s expensive right now if you got the guts to hold it over the next 20 years, not just 10, I think you’ll do very well.

Also, in Eastern Europe, I believe Poland and the Czech Republic are a bit of a gem. I think Russia is so dirt cheap and there’s some positive change going on there in some ways as well with corporations and economic growth and so forth and also some negative things remain too, which we don’t have to discuss because they’re a lot more political. It’s kind of fashionable to be talking about what’s wrong with Russia these days, so I don’t want to get involved. Russia is also a very interesting investment too.

When it comes to Asia, I do continue to like China, Japan, South Korea, Singapore and Taiwan. This area of the world seems to be breaking out on the upside and as we covered last week with emerging markets, China, South Korea, and Taiwan make up about 50% of the index. Japan is not part of the index, but Japan also broke out too. Whether these four or five countries will remain above their recent resistance that they broke out from and whether these lines of resistance are now going to act as support is the key question that we have to ask ourselves. It’s the key line that we have to watch.

Generally speaking, these are some of the places that I’m investing in. They’re a lot more attractive than the United States, but that doesn’t mean that I’m neglecting the United States in my portfolio. Having some trading skills, I understand I can stay in the momentum game and as long as it continues to go up and it wants to go up, why not be part of the bull market seriously?

Even if valuations go even higher eventually the bull market will end. Just make sure when the trend ends to step aside and raise cash and get out of the market because it could really disappoint you on the downside Jordan.

yeah, look, if I had to pick one, I guess I already voted with my money as I’m definitely investing in the Czech Republic right now, both physical assets and financially.

Jordan Roy-Byrne: Okay, Tiho, well thank you so much for that. I’m thinking for episode number 20, we should probably cover what’s going on in the currency market since the dollar is going to play a very big role with respect to the near term and the long term as to how the markets of many of these countries will perform. Do you think that’s a good plan?

Tiho Brkan: Definitely, I’m looking forward to it. We’ll get into the United States dollar, we’ll get into the majors and then, we’ll get into the emerging market currencies too. 

Thank you for listening to The Atlas Investor Podcast. To be notified of future podcast episodes, sign up for our free newsletter and visit our YouTube Channel. Tiho Brkan offers his clients a wide range of services, including portfolio construction and wealth management, one on one consultations, global real estate opportunities, international tax planning, citizenship and residency planning and one on one mentoring. For a free consultation, visit theatlasinvestor.com and contact Tiho Brkan.

Tiho Brkan
I am male in my early 30s. I was originally born in Croatia, but am an Australian citizen, while currently living in Hong Kong. I hold a business degree with focus on accounting, finance and marketing.

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